Phoenix (PHNX) is the UK’s largestconsolidator of closed life assurancefunds or insurance policies that are no longer open to new business.

It may seem a pure income play, offering a prospective dividend yield of 6.8% for 2018.

That makes it the 35th largest dividend yield in the UK after Phoenix’s £3.2bn acquisition of Standard Life Aberdeen’s (SLA) Assurance business in February, according to analysts.

But many income investors may never have heard of Phoenix, despite its solid history and promising future of dividend payments.

Investment bank Berenberg analyst Trevor Moss says the market still doesn’t ‘appreciate the merits of closed book consolidation and therefore Phoenix in particular’.

However, he adds the yield is too high, saying it should reflect a business ready to grow its dividend while writing new business, rather than ‘one that is closed forever and running off to zero’. Essentially, he thinks the shares should trade much higher than their current price, as that would help bring the yield down.

IS THE BUSINESS GROWING?

For Phoenix, the Standard Life Aberdeen Assurance deal is a gamechanger, as its business relies on scale for returns on capital and costs.

The deal extends Phoenix’s reach beyond the £380bn potential market in the UK to £540bn of potential assets across the UK, Germany and Ireland.

This sort of extra scale represents an additional £5.5bn of cash flows over time, with £1bn expected before 2022. This extra cash will drive future dividend payments.

The integration of the Assurance business will take time, at least two years but Berenberg’s Moss believes it could eventually launch Phoenix into the FTSE 100 index.

CHANGING BUSINESS MODELS

The life insurance sector is changing. Standard Life Aberdeen wanted to become a ‘capital light’ asset manager hence why it decided to dispose of its ‘capital intensive’ Assurance business.

Similar examples of change in the life insurance model include companies looking to cut costs by outsourcing non-core activities and concentrate on what they’re good at. Phoenix can pay attractive prices for businesses that no longer fit into a group’s model.

Phoenix’s expertise with closed funds allows it to provide a scalable platform for further funds and its scale gives it the ability to be more efficient.

The company recently announced it is in an exclusive agreement over another annuity transaction, demonstrating its ambition to build on the Assurance deal. (DS)

‹ Previous2018-04-05Next ›